We are being taxed for a qualified Roth IRA deduction

I don't know whether it makes any difference, but your statement about the origin of the Roth can't be true. It wouldn't be a bad idea to nail that down rather than guessing.

They don't. You will account for this in Part III of Form

8606 on your 2006 return. Assuming it really was a qualified Roth distribution, the bottom line there is zero taxable. You wind up with $10,000 on line 15a of the 1040 and zero on 15b.

-- Phil Marti Clarksburg, MD

How was the Roth "a gift" from his uncle? You can't gift Roth IRAs.

Is he over 59.5? Has he had a Roth for at five years? If not, the custodian is correct -- it's *not* a qualified distribution.

The custodian doesn't know what you did with the money and it's none of their business.

Exactly correct.

You don't "prove" it to the IRA custodian, you "prove" it to the IRS. When you fill out Form 5329 you will say that you're not subject to the early withdrawal penalty because of what you used the distribution for. If the IRS ever comes calling over that (they very likely won't), you show them the paperwork on buying the house, the deposit record for depositing the distribution check, and the copy of the certified check you used for the down payment.

-- Rich Carreiro snipped-for-privacy@animato.arlington.ma.us

Of course the investment company doesn't know what you did with the money. You have to tell the IRS yourself what you did with it. You report this on Form 8606. Your tax preparer should have known this, or if you are doing your own taxes, maybe you need some help or a better program.

Recently saw a similar issue debated in another forum. It pretty much came down as follows. The early withdrawl is taxable income. The exception for 1st time home buyer is that you don't have to pay the 10% early withdrawl penalty. ... sometimes I wonder why anyone would want a Roth in the

1st place - it violates tax planning 101 ___________________________________

-----> real address on hobokeni or hobokenx

You need to use form 8606 to determine the taxable amount of the distribution. You use the 1st time homebuyer $10000 distribution you qualify for on that form to reduce your taxable amount.

Benjamin Yazersky CPA"

In what way does Roth violate tax planning 101?

-HW "Skip" Weldon Columbia, SC

You lost me in the first paragraph. The word "IRA" means Individual Retirement Account, whether it be a traditional or Roth IRA. As such, one can not gift an IRA to another individual. Are you sure it wasn't just left to your husband when the uncle died? If inherited, there were certain minimum distribution rules that your husband should have been following.

The form I got from my broker when I did something similar had the Q for qualified already on it. Do I need to do anything else. TaxCut seemed happy with the outcome, but I don't know if the IRS would be (g).

Incorrect. Once the 5 year test is met, a $10,000 lifetime distribution for first-time home purchase is a qualified distribution regardless of age. See Pub 590.

-- Phil Marti Clarksburg, MD

This is wrong on a couple of fronts. First, it may be a qualified distribution from the Roth. Even if it's not a qualified distribution, the ordering rules apply, which could result in zero taxable income from the distribution. All discussed in Pub 590.

-- Phil Marti Clarksburg, MD

Roth distributions that are not in excess of basis are not taxable or have penalties if were contributions or conversions over 5 years, so unless your amount withdrawn dips into earnings only then would you have taxable roth distributions with or without the house, the first time home buyer exclusion is only an exclusion for penalty, which if you dipped into earnings and had taxable distributions you would have being under 59.5 years old, and could exclude up to 10k from the penalty but would still be taxable.

I suspect the original poster means the rule of thumb about always deferring incurrent tax whenever possible. Which is good as far as it goes, but is certainly not absolute.

-- Rich Carreiro snipped-for-privacy@animato.arlington.ma.us

"HW \"Skip\" Weldon" wrote:

Well, Tax Planning 101 would say that the goal is to postpone taxation as long as possible. $1 today is worth more than $1 tomorrow or 20 years from now. The traditional IRA follows that rule: deduct the contribution (don't pay tax on that income today), pay tax on it (and on the accumulated earnings) when you withdraw it later. The Roth IRA turns that on its head: pay the tax now and put the money away to accumulate earnings, and when you withdraw it there will be no tax on either the amounts contributed (you already paid the tax on that) or on the accumulated earnings. Of course it's the forever tax-free earnings that make the Roth attractive. But it's more sophisticated than Tax Planning 101. It's more like 102, or maybe even 201 . Whether the traditional or the Roth turns out to be more favorable in the end, it seems to me, depends on a lot of things, including tax rates at the time of contribution and at the time of withdrawal, the performance of the markets in the interim, and so on. Looking at it from the point of view of retirement, I'm sure I have more capital now than I would have had if I had saved after-tax dollars for retirement instead of putting my savings into a 401(k). But if I had invested after-tax dollars, I wouldn't have to pay tax on that money now, whereas I pay tax on every dollar I withdraw (as I'm required to do, being over 70-1/2) from my 401(k). Am I better off, net, than I would have been if I'd used a Roth type vehicle (if one had existed) when I was working? Well, as a quick and dirty measure, I started contributing to my

401(k) in 1987, when the Dow was about 2,500 (and almost immediately dropped to around 1,700 in October of that year). Now the Dow is over 12,000. My accounts benefited from the huge increases in equity values in the 1990s and the past couple of years. I'd guess, all else being equal (which of course it never is), I'd probably have been better off, net, with a Roth. Plus I'd have the advantage of having paid the tax on my contributions, and forgotten all about that pain, long ago, rather than suffering the pain today . Katie in San Diego

Easier to reply to your reply than the former.

A ROTH never violates tax planning, whether TP 101 or TP

202. For everything there is a season. (Hmmm. I like that.) A time to defer and a time to pay; A time to convert and a time to stay; A time to rise, and a time to duck, A time to love and a time... (uh oh! nevermind)

TTP (Total tax planning) is the key phrase. I've had occasion to plan ahead for a client even over a 30 year time horizon. And even for myself my horizon is also about the same. For someone who can deduct an IRA it makes sense. For others who are prohibited from contributing to a tax deductible IRA, the ROTH makes more sense. In fact that's all I do these days on a personal level. (My corporation can still contribute to the SEP however.) A ROTH is a nice way to leave a sizeable estate to your children. ChEAr$, Harlan Lunsford, EA n LA